Fixing California: Report ignores state’s vast pension liabilities

Imagine a family in which both parents work and make $100,000 a year between them but have $300,000 in steadily growing credit-card debt. If the parents got raises and their income increased to $110,000 a year, would you say the family is suddenly in good shape financially? Of course not.

But that sort of happy talk is just what we’re hearing from state leaders after an upbeat report from the Legislative Analyst’s Office predicted a coming era of budget surpluses because of revenue from tax hikes and a surge in capital-gains tax receipts, thanks to Wall Street’s latest boom.

The 62-page report mentions the state’s massive unfunded liabilities for the California Public Employees’ Retirement System and the California State Teachers’ Retirement System only briefly. A more thoughtful assessment would have mentioned those liabilities on nearly every page.

As of September, CalPERS had about $260 billion in assets and about $340 billion in liabilities. Those numbers are based on CalPERS’ assumption that decades of investment returns will average 7.5 percent annual growth.

But a comprehensive 2011 study overseen by Joe Nation, a professor at the Stanford Institute for Economic Policy Research and a former Democratic state lawmaker, concluded assumptions of 5 percent to 6 percent are more historically appropriate. In September, Nation said a more realistic assessment of CalPERS’ current unfunded liability is $170 billion — not $80 billion.

Yes, CalPERS serves local governments as well as the state. But the state is by far its biggest client. The Legislative Analyst’s Office’s report simply doesn’t contemplate what state budgets would look like in coming years if they addressed and paid down the state’s share of CalPERS’ unfunded liability. Instead, it only predicts a slow growth in annual contributions to $2.8 billion by 2019-20 — meaning the total unfunded liability will continue to grow by billions each year.

CalSTRS is in even worse shape than CalPERS. The state teachers’ pension system reports assets of $172 billion and an unfunded liability of $70 billion. But it too uses the 7.5 percent projection for investment returns. Even with that questionable assumption, CalSTRS is on track to run out of funds in 2043. If Nation’s more prudent model were followed, CalSTRS’ unfunded liability would double, and it would run out of funds long before 2043.

Once again, the LAO report doesn’t contemplate what state budgets would look like in coming years if they addressed and paid down CalSTRS’ unfunded liability. Even if the optimistic 7.5 percent earnings estimate is used, it’s been estimated that CalSTRS needs $4.5 billion a year for 30 years to dig out of its financial hole. Yet the LAO only predicts a slow increase of state funding to $1.8 billion in 2019-2020.

And CalPERS and CalSTRS are not the only huge long-term funding challenges facing the state. Controller John Chiang says the state has a $63 billion liability in unfunded retiree health benefits, for example.

These immense shortfalls are real. At some point, they must be paid. Any state agency that depicts state finances in a good light by downplaying these long-term obligations is being destructive, not constructive.